Renewable energy continues to disrupt the traditional energy space, whether you're looking at the collapse of coal in the U.S. or the rise of electric vehicles around the world. That creates a tremendous opportunity for investors in renewable energy stocks.
We asked three of our Foolish contributors for their top renewable energy picks in October, and SunPower (SPWR -3.14%), NextEra Energy (NEE -0.06%), and Algonquin Power & Utilities (AQN -2.12%) rose to the top. Here's why we like these stocks above others in the industry.
The future of small-scale solar
Travis Hoium (SunPower): The residential and commercial solar industries have long been dominated by large installers that do everything from sales to financing to installation. This has made selling solar simple, with $0 down leases or power purchase agreements and then long-term agreements to sell energy to customers. But that structure may not make the most sense long term as the cost of loan financing comes down and sales costs for each solar installation goes up.
SunPower thinks it has found efficiencies by digitizing the quoting and sales lead process. Customers can go on its website and get a solar design in less than a minute, replacing costly door-to-door sales that have long driven the industry's sales. SunPower then provides those leads to local partners, who use SunPower-provided solar panels, monitoring, and racking for their solar installation. Long term, working with these smaller, more nimble installers and leveraging digital sales should lead to better pricing and a higher market share for SunPower in residential solar.
Commercial solar is another big market, and SunPower is the No. 1 provider in the U.S. It designs solar systems for large industrial rooftops, and adds monitoring and in some cases energy storage. This isn't a high-margin business yet, but if SunPower can reduce costs, it could make commercial solar into a big and profitable business with a $3.5 billion pipeline and $400 million of contracted backlog.
After spinning off its manufacturing business in Maxeon Solar Technologies (MAXN -3.70%), SunPower is a more capital-light business, providing sales, financing, and technology solutions to residential and commercial solar installers across the country. Given the growth potential for solar in the U.S., investors should be excited about this business disrupting the market long term.
Growth with a hedge
Howard Smith (NextEra Energy): It's October already, so investors may be wondering about the best way to play the upcoming election. Regardless of the outcome, the best way to play it is, well, not to play it.
Long-term investing is the right way to grow wealth. But if short-term concerns are keeping you up at night, an investment that might fit your needs is NextEra Energy. Besides ownership in the fast-growing renewable energy sector, the company also provides investors a hedge with its electric utility business.
The push toward green energy is on, regardless of who wins in November. Politicians may be able to speed it up or slow it down, but even fossil fuel giants like BP (BP -1.02%) and Royal Dutch Shell (RDS.A) are already shifting their business models.
BP CEO Bernard Looney told investors earlier this month the company has a new transformational strategy. It plans to reduce oil and gas production by 40% over the next decade, and increase investment in low-carbon energy, specifically building wind and solar power generation. It recently announced a partnership with Norwegian energy company Equinor (EQNR -1.19%) to develop offshore wind projects in the U.S. And Shell has said it plans to meet a goal of "net zero" emissions by 2050 by going green.
With these industry tailwinds, it's easy to pick NextEra as a winner in the race to renewable energy production. Its subsidiary, NextEra Energy Resources, along with its affiliates, is the world's largest generator of wind and solar power. NextEra recently increased its near-term growth expectations, saying earnings for 2021 will be higher than its previous guidance, and extended its 6% to 8% annual growth expectations through 2023. It also announced a 4-for-1 stock split, as its shares have significantly outperformed the S&P 500 over the past several years.
Along with that growth, however, comes a more stable electric utility business. NextEra owns Florida Power & Light, the largest regulated electric utility in the U.S. by retail megawatt-hour sales, as well as Gulf Power, which serves the northwestern part of the Florida. Though NextEra's dividend yield is lower than typical utilities at about 2%, it balances that with its growth in renewables.
So if you want to get into renewables ahead of the election, NextEra Energy might be the right stock for you. Regardless of politics, this business will continue its growth strategy, and is anchored with an electric utility to weather any ups and downs that may come from legislative policy direction.
The other renewable utility (you've maybe never heard of)
Jason Hall (Algonquin Power & Utilities): NextEra Energy gets a lot of love as a forward-looking utility that's advancing the use of renewables. And rightly so, for the reasons my colleague just described. But it's not the only utility out there that investors should consider; there's a wonderful company based just north of the border in Canada, Algonquin Power & Utilities, that looks worth buying right now.
What makes Algonquin appealing? Like NextEra, it operates both regulated utilities and a non-regulated business selling wholesale power (called Liberty Power), and has focused heavily on developing renewable power assets. These include wind and solar, as well as using wood pellets made from waste wood instead of coal and natural gas in some of its older facilities. But I think Algonquin is in a better position to turn the growth of its unregulated renewable power business into outsize returns for investors. Algonquin generated $1.6 billion in revenue over the past year, less than 10% of NextEra's $19 billion in revenue.
Moreover, Algonquin just looks cheap right now, trading for about 15 times trailing earnings, while its dividend yield of 4% at recent prices is also very attractive. And since implementing a dividend in 2012, the payout has increased 126%; better yet, the payout ratio -- the percent of earnings it pays in dividends -- is below 50%, meaning it's both secure, and there's room to continue growing the dividend along with earnings in the years to come.
Whether you already own NextEra or not, or are just looking for another clean utility to own, Algonquin should be high on your list. At recent prices, it's worth buying now.
3 ways to play renewable energy
There are a lot of ways for investors to make money in renewable energy today. Manufacturing, deployment, and long-term asset ownership all play a role in the industry, and SunPower, NextEra Energy, and Algonquin Power focus on the deployment and long-term ownership of assets. These companies are lower-risk ways to invest in the industry and they're our top picks today.